S (and) P/TSX INDEX VERSUS DOWJONES INDUSTRIAL AVERAGE AND LET’S ADD INFLATION!

It has been said that there are Liars, Damn Liars and Statisticians – and you can throw in Economists for good measure! Another approach is to ask a mathematician, an accountant and an actuary the result of the formula 2 plus 2 equals what? The mathematician will say 4, the accountant will say that depends (explains a lot about some financial reporting!) and the actuary will ask, what do you want it to equal? Through creative choices, numbers can be made to say just about anything a person desires, if you apply enough “logic” – no matter how flimsy!

Apples to bananas! As we explore the effects of growth rate assumptions on financial, estate and insurance planning, I am going to take a slight detour to briefly discuss two benchmarks commonly in use – the most popular being the S&P/TSX – which is an INDEX, and the DJIA which is an AVERAGE – they are NOT interchangeable nor do they measure the same things!

The DJIA measures the 30 largest (by market cap) US Corporations – subject to annual reviews and adjustments. The S&P/TSX measures (allegedly) the 300 largest (by market cap and not necessarily purely Canadian) companies trading on the TSX. At last count, there are apparently about 290 companies included in the S&P/TSX Index. Finally, one is expressed in CDN currency and the other in US currency so variations in the DJIA, as usually seen in Canada, also reflect exchange rate movements.

As you can see, the DJIA is only a very narrow “measurement” of market value and movement while the S&P/TSX is, at least in theory, a reflection of a much broader market. Very different measurements yet for some reason they are entwined as being very similar, if not identical – and not just by the media, many in the financial services industry are also guilty of this “grouping” for comparison purposes.

The closest US market measurement to the S&P/TSX Index is the S&P 500 Index – as the name implies, measuring the movement of the largest 500 US Companies – also in US Currency and then converted to CDN $ for use here – again adding exchange rate movements to the changing index values.

Many people are unaware that we (Canadians) do have a “large cap” index that is SIMILAR, but not identical to the DJIA – it is the TSX60 – which measures the 60 largest companies trading in Toronto. So, if comparisons about movements, trends, etc. are to be made, it is certainly far more appropriate to compare movements (net of currency exchange effects), between the DJIA and the TSX60. Other major exchanges around the world also have narrower, large cap sub-indices similar to the TSX 60.

For more specific information about the compositions of the various indices and market averages, please refer to their specific websites – or have fun with Wikipedia.

Inflation has been around since someone started to track changes in prices of various goods and services. In Canada, we use the Consumer Price Index as measured by Statistics Canada. All details can be found on their website plus additional information on Wikipedia. Obviously, the basket of “goods and services” in use today is very different than 50 years ago – even 20 years ago – consumer choices and options change – therefore so does the “basket”. In Canada, inflation is separated into a “full measure” of everything and then a variety of sub-indices such as “core” inflation along with others such Health Care, Education, Recreation, etc.

Comparisons between inflation rates amongst various countries is close to impossible – each country is measuring different items, then of course, we may have currency issues that could also affect published rates – check the websites for each country to determine how currency may impact published results.

All too often, people in our industry and in some cases the media, tend to use a single inflation assumption in our planning – which is patently incorrect. When people retire, the effects of inflation are typically higher due to probable higher costs for Health Care and Recreation, while some aspects of the total inflation rate will drop such as business transportation.

I will discuss inflation in planning in more detail in a future blog – my only purpose here is to caution people to be careful about your chosen basis for assumptions during different phases of the planning process – different rates for education costs, health care, recreation, housing, etc. are all appropriate – a single presumption is not!

BTW, I watch Business News Network each morning to catch Marty, Frances and Michael plus their various guests – plus I regularly use their website – www.bnn.ca – for other updates and information on various indices – including the TSX60.

How do I know if I need Financial Advice in my Divorce?

By Eva Sachs CFP CDFA

Certified Divorce Financial Analyst and Founder of Women in Divorce Financial

“  I just want what’s fair …I just want what I’m entitled to.”

If it was just that easy, divorce lawyers & courts wouldn’t be busy.

My  approach for divorcing women is from the perspective “ what  do I need to be OK?”

I believe that most divorcing women do want to arrive at a settlement that works for both partners. What’s missing in most divorces processes is financial expertise.

How do you know if you need financial advice in your divorce?

If any one of the situations listed below is your case, you have good reason to get some expert financial advice

  • You don’t understand your situation
  • You have a good income and a busy schedule, so you would be better off if someone else did the paperwork
  • You want to be sure you’re doing the right thing and have the confidence of knowing it’s being done right
  • The division of marital assets and debts is unequal
  • Home or real estate  is being kept to sell later
  • Major asset is being divided or sold
  • One or both spouses are self-employed owners

With expert financial advice early in the divorce process, women can increase their chances for arriving at a settlement that works.

Are you Financially Prepared for Divorce?

By Eva Sachs CFP CDFA

Certified Divorce Financial Analyst and Founder of Women in Divorce Financial

 “Why didn’t I pay more attention to our family finances?”

I frequently hear this from women who find themselves facing divorce.  This is the time for women to start to make constructive and knowledgeable decisions about their money and their future. It’s never too late to get started.

Here are some steps you can take to get financial prepared for your divorce. (Frankly it’s good advice even if you aren’t facing divorce)

Pay Attention to the Household Finances
You should attend meetings with insurance agents, accountants, financial planners and lawyers. You should also look over monthly bank statements and credit-card bills. Ask about your husband’s company benefits including bonuses, other “perks”,  company pensions, and other savings  plans, etc. Keep a list of all bank and brokerage accounts and insurance policies.

Don’t lose your Financial Identity
You always want to maintain your own credit identity. Check if your credit cards are in your own name or if you are simply an authorized user as a lack of credit history can work against you.  You should have three bank accounts (his, hers and ours) and maintain separate credit cards.

Keep Your Skills Fresh
While you might welcome the chance to stay home with your kids, the longer you’re out of the work force, the harder it can be to jump back in. Women often face lowball wages or lower job titles when they try to return to work after a long hiatus.

Save for Retirement
Many married women don’t make retirement-saving a priority. If the husband is the primary wage earner, the wife often trusts her spouse to save enough for their collective golden years. A woman spending her retirement savings, (sometime all on legal fees),   is particularly distressing considering that women, on average, live six years longer than men.

Get Financial Guidance
When women are going through a divorce, they need to determine which assets will help them pay their bills and reach their long-term goals. Too many women fight for the home to avoid uprooting their children, only to find that they don’t have the cash flow to pay for it.

Divorce is not only the end of a marriage but it is the breakup of an economic unit. Financial awareness will go a long way to help you feel more in control and better equipped to make reasoned decisions.

So – average interest and growth rates – are they realistic or do they create misunderstandings for both clients and advisors?

Ever since I was a lad (yes, that long ago), all calculations for determining amounts of insurance, how fast savings and investments grew and how retirement income rates were deterimined, have used “average” rates of return – not even median rates – just average rates. And for about 100 years or so, people seeemed happy with that approach until the 1970s and 80s came along with rampant inflation, outlandish rates of return and then a wonderful market “correction” in the latter part of 1987.

No-one knew quite what to do, but a couple of smart young men came up with the idea to put this all on a chart so people could at least examine history – in one place – and hopefully make some better choices and assumptions while planning for their futures – and the ANDEX (copyright) chart was born! I loved it immediately (lots of pretty coloured lines and graphics too – I am easily amused)! Fortunately for our industry and our clients, this chart is not just still available, it has been expanded and updated to include even more useful information under the Morningstar banner (and no, I don’t get any compensation for saying this!

These charts (and other following competitor versions) also included the “average” rates of return for the various market segments for various time periods. While interesting to see the changes over time, I feel these “averages” actually took away from the validity of the material – which was to show that segments of the markets move randomly and that while “average” projections were interesting, they weren’t overly valuable for making long-term projections. These charts also provided all of the necessary proof that GICs and savings bonds were neither adequate on their own and that in order for a client to enjoy any reasonable probability of achieving their goals, other assets and products had to be considered.

Having received a great amount of both theoretical and experiencial education in this phenomenon, I have come to the conclusion – despite having been guilty (along with the rest of our industry) of using average growth rates in everything from growth in universal life policies, estimating future values for investments and planning for both retirement and estate distributions – sometimes 40 years into the future – this practice is now foolhardy in the extreme!

Stay tuned for the next collection of wandering thoughts as I explore this further using some actual numbers!